Why Is Financial Literacy Important?
The ideal place to begin strengthening your financial literacy is with this guide. Start today to become financially literate. You can start implementing the methods you read about in this article immediately.
If you’ve been reading financial news or publications, you’ve probably heard the term “financial literacy” before. It’s all about educating individuals on sound financial principles and techniques so they can handle their money wisely. It is an important concept considering how many people handle money. According to statistics, over a quarter of the U.S. population never saved any money every month.
In addition, 75% of people are in some form of debt.
As a result of these numbers, it is apparent that action needs to be taken to increase people’s knowledge about money. So, let’s dive into it and see how you can build your financial skill set.
Table of Contents
What Financial Literacy Means!
Making wise financial decisions requires financial literacy. It’s important not to be misled by the word ‘literacy.’ This does not mean you have to be a money expert. It also doesn’t mean that you need to know all the buzzwords in the world of finances.
It simply means that you can understand major financial issues and be able to avoid them. These issues include:
People who are literate about finances know how to handle a budget effectively. Moreover, they are aware of how to use sinking funds and know the difference between different education loans and retirement plans.
What are the 5 Principles of Financial Literacy?
The first principle is to understand your salary. By understanding it, I mean understanding the benefits of your pay to make the most out of what you earn.
Also, take into account the benefits that your workplace gives you, such as retirement plan savings and so on.
2. Save and Invest
To become smart with money, you need to save and invest. Save for future goals. Maybe you want to buy a house in the future or want to live a comfortable retirement.
Here, you have to create a budget. Creating a budget will make achieving your goals and aspirations a lot easier.
Protecting means safeguarding yourself against unexpected emergencies. Emergencies can be the biggest threat to your financial well-being. They can turn out to be very costly when you least expect them.
Protecting yourself financially means creating an emergency savings fund. Further, it also means; making sure you have the right insurance plans in place for you and your loved ones.
Purchasing wisely entails receiving good value for your money. You can do this by comparing your options when you go shopping.
When there is a large purchase, think twice before buying. Sleep on it or assess whether it is a want or a need.
Borrowing money allows you to make substantial purchases that you otherwise could not afford. This could imply enrolling in college or purchasing a house.
Yet, you must ensure that you are prepared for debt before thinking about taking it on. All debt is not bad. By providing the liquidity requirements needed as your investments grow, wise loan decisions can even help you increase your wealth.
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What is an Example of Financial Literacy?
An example of financial literacy could be understanding:
- Interest rates
- Debt management
- Compound interest
If, for instance, you were to teach these topics to a kid, they would know how to manage their education loan when they grow older. This would help them not rely on their college fund too much. Or, worse, endangering their future finances and credit scores.
Additionally, teaching our kids about money makes it easier for them to navigate income taxes and savings when they grow older.
Of course, these concepts can also be useful if you learn them in adulthood. However, the sooner, the better.
Why Financial Literacy is Important
The lack of money knowledge can lead to many problems. This happens because people are not mindful of where their money is going. Their spending habits are poor. They stem from a place of short-term pleasures instead of long-term preparation.
All this happens due to being financially illiterate or not being mindful of money. In turn, this leads to many people suffering health losses because they cannot afford healthcare. Furthermore, there are other consequences like; bankruptcy, poor credit, and housing foreclosure, among many others.
Thus, to save yourself from these negative and potentially dangerous occurrences, financial literacy is important.
Further reading: Financial Habits That Will Change Your Life
How can We Improve Financial Literacy?
To improve financial literacy, you should learn and practice several tried and tested strategies relating to budgeting, managing debts, and understanding investment and trading.
Here are a few important skills that form base-wise money handling:
- Creating a budget – Tracking how much you spend each month is the first step to improving your finances. Create an Excel sheet or record your expenses on a budget app. Or, go old school and use a pen and budgeting journal/diary. Budgeting should include income, fixed and variable expenses, and savings.
- Paying bills immediately – Stay on top of monthly bills and make sure the payments arrive on time. Take advantage of automatic payments from a checking account or apps that offer payment reminders.
- Managing debt – Your budget should also help you manage and pay off debts by reducing your spending. Hence, keep debt payment an integral part of your budgeting process.
Investing in your future – Take advantage of any benefits that your employer offers, including retirement plans. In addition to that, be sure to sign up and contribute the maximum to receive an employer match. Moreover, create a diverse investment portfolio of fixed-income, stocks, and commodities.
As a result, financial literacy is the knowledge that will enable you to handle your money successfully. It involves creating a budget, knowing how much money to set aside, and being aware of how decisions you make affect your long-term financial objectives.
These abilities will ultimately determine how and where you are in life in 10, 20, or 30 years. You will also have a happier life and develop into a person who is a lot more financially responsible.
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